GOOD BODY LANGUAGE ON REVENUES AND MARGINS; REITERATE BUY
Investment recommendation
We are increasing our estimates and reiterating a BUY recommendation, with a view that PC and consumer semiconductor inventory concerns have masked opportunities for Magma in a strong semiconductor design cycle with potentially accelerating share gains. This note follows our hosting Magma management for a day of meetings in the San Francisco Bay Area yesterday. The tone of the meetings was upbeat, especially with respect to operating margin targets, the potential for product roadmap-driven share gains, and a rising tide for EDA. Anecdotally, our semiconductor field applications engineer checks peg this as one of the busiest summers in years, boding well for loosening purse strings at Magma's customers and the rising tide thesis.
Valuation
LAVA is trading at 10.8x our C2011 estimates for EPS, versus a median multiple of 11.3x for our coverage universe, which is a 4% discount. On a market cap to revenues basis, LAVA is trading at 1.5x our C2011 estimate. This is a 6% discount compared to a median market cap to revenue multiple of 1.6x for our coverage universe.
We are increasing our estimates and price target
· Revenue: Q3/C10E increased from $32.3 million to $33.3 million; C2010E increased from $130.9 million to $133.5 million; C2011E from $141.0 million to $147.2 million.
· EPS: Q3/C10E remains $0.06; C2010E increased from $0.22 to $0.23; C2011E increased from $0.31 to $0.35.
· We are increasing our price target to $4.50 from $4.00. LAVA’s price target of $4.50 is 12.9x our C2011 EPS estimate of $0.35. This is a premium to an 11.3x multiple for our coverage universe.
Disclosure: LAVA owner